Merrill Lynch, which last week ousted CEO Stan O’Neal, recorded an $8.4 billion write-down in the third quarter, up more than 50 percent from its forecast.

“We believe that investor confidence in companies’ ability to value their own holdings has been seriously shaken,” Freeman wrote in a note to clients.

Meanwhile, U.S. bank and brokerage stocks dropped on Monday morning, the day after Citigroup Inc (C.N) said it may record an additional $11 billion write-down related to subprime mortgages.

On Merrill, Freeman said further write-downs of asset-backed securities collateralized debt obligation and subprime exposures loom due to deteriorating mortgage credit fundamentals post-September, as well as increased risk from counter party exposures on mortgage-related hedges that it has in place.

Freeman also believed it was conceivable for shares of Merrill to retrace the valuation lows of early 2003, which was a tough time for the firm. This would imply a price as low as $44 and if the shares reached this level, they would represent an opportunity to become more aggressive, he said.

He lowered the price target on Merrill Lynch to $58 from $79.

On Bear Stearns, Freeman said the shares could struggle because of deteriorating fundamentals in parts of the credit business that are more core to the company than any of its competitors, and comparatively less international exposure.

Freeman said Bear Stearns was trading at a valuation that he considered cheap, adding that the stock may have value to longer-term oriented investors at these levels. He cut his price target on Bear Stearns to $117 from $145.

Freeman kept his rating on Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) unchanged at “equal weight”, but said the stocks were not without risk.

Merrill shares were down 2 percent at $56.12 and while those of Bear Stearns fell more than 1 percent to $100.93 in late morning trade on the New York Stock Exchange. (Reporting by Neha Singh and Avishek Mishra in Bangalore)